[Federal Register: August 3, 1999 (Volume 64, Number 148)]
[Proposed Rules]
[Page 42175-42203]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03au99-25]
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Part II
Department of Education
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34 CFR Part 682
Federal Family Education Loan (FFEL) Program; Proposed Rule
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DEPARTMENT OF EDUCATION
34 CFR Part 682
RIN 1840-AC78
Federal Family Education Loan (FFEL) Program
AGENCY: Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend the Federal Family Education
Loan (FFEL) Program regulations. These proposed regulations implement
changes made to the Higher Education Act of 1965 by the Higher
Education Amendments of 1998 (the ``1998 Amendments''). The proposed
regulations cover a variety of items, including changes to the
financial structure of guaranty agencies in the FFEL Program.
DATES: We must receive your comments on or before September 15, 1999.
ADDRESSES: Address all comments about these proposed regulations to Ms.
Pamela A. Moran, U.S. Department of Education, P.O. Box 23272,
Washington, DC 20202-5449. If you prefer to send your comments through
the Internet, use the following address: ffelnprm@ed.gov
If you want to comment on the information collection requirements,
you must send your comments to the Office of Management and Budget at
the address listed in the Paperwork Reduction Act section of this
preamble. You may also send a copy of these comments to the Department
representative named in this section.
FOR FURTHER INFORMATION CONTACT: Mr. George Harris, U.S. Department of
Education, 400 Maryland Avenue, SW., room 3045, ROB-3, Washington, DC
20202-5449. Telephone: (202) 708-8242. If you use a telecommunications
device for the deaf (TDD) you may call the Federal Information Relay
Service (FIRS) at 1-800-877-8339.
Individuals with disabilities may obtain this document in an
alternate format (e.g., Braille, large print, audiotape, or computer
diskette) on request to the contact person listed in the preceding
paragraph.
SUPPLEMENTARY INFORMATION:
Invitation to Comment
We invite you to submit comments regarding these proposed
regulations. To ensure that your comments have maximum effect in
developing the final regulations, we urge you to identify clearly the
specific section or sections of the proposed regulations that each of
your comments addresses and to arrange your comments in the same order
as the proposed regulations.
We invite you to assist us in complying with the specific
requirements of Executive Order 12866 and its overall requirement of
reducing regulatory burden that might result from these proposed
regulations. Please let us know of any further opportunities we should
take to reduce potential costs or increase potential benefits while
preserving the effective and efficient administration of the program.
During and after the comment period, you may inspect all public
comments about these proposed regulations in Room 3045, ROB-3, 7th and
D Streets, SW., Washington, DC, between the hours of 8:30 a.m. and 4:00
p.m., Eastern time, Monday through Friday of each week except Federal
holidays.
Assistance to Individuals With Disabilities in Reviewing the Rulemaking
Record
On request, we will supply an appropriate aid, such as a reader or
print magnifier, to an individual with a disability who needs
assistance to review the comments or other documents in the public
rulemaking record for these proposed regulations. If you want to
schedule an appointment for this type of aid, you may call (202) 205-
8113 or (202) 260-9895. If you use a TDD, you may call the Federal
Information Relay Service at 1-800-877-8339.
Background
These proposed regulations are needed to implement and reflect
changes to the Higher Education Act of 1965 (the HEA) made by the 1998
Amendments, Public Law 105-244, enacted October 7, 1998.
The FFEL Program regulations (34 CFR part 682) govern the Federal
Stafford Loan Program (subsidized and unsubsidized), the Federal
Supplemental Loans for Students Program (no longer active), the Federal
PLUS Program, and the Federal Consolidation Loan Program (formerly
collectively known as the Guaranteed Student Loan Programs). A lender
that is eligible under the HEA may make guaranteed loans under the FFEL
Program. A guaranty agency is a State or private nonprofit entity that
has an agreement with the Secretary to perform certain administrative
roles in the FFEL Program. Guaranty agencies receive and hold Federal
funds to pay certain FFEL Program costs and expenses. They are trustees
for the Federal Government and must comply with fiduciary standards.
Negotiated Rulemaking Process
Section 492 of the HEA requires that, before publishing any
proposed regulations to implement programs under Title IV of the HEA,
the Secretary obtain public involvement in the development of the
proposed regulations. After obtaining advice and recommendations, the
Secretary must conduct a negotiated rulemaking process to develop
proposed regulations. All published proposed regulations must conform
to agreements resulting from the negotiated rulemaking process unless
the Secretary reopens the negotiated rulemaking process or provides a
written explanation to the participants in that process why the
Secretary has decided to depart from the agreements.
To obtain public involvement in the development of the proposed
regulations, the Secretary published a notice in the Federal Register
(63 FR 59922, November 6, 1998) requesting advice and recommendations
from interested parties concerning what regulations were necessary to
implement Title IV of the HEA. We also invited advice and
recommendations concerning which regulated issues should be subjected
to a negotiated rulemaking process. We further requested advice and
recommendations concerning ways to prioritize the numerous issues in
Title IV, in order to meet statutory deadlines. Additionally, we
requested advice and recommendations concerning how to conduct the
negotiated rulemaking process, given the time available and the number
of regulations that needed to be developed.
In addition to soliciting written comments, we held three public
hearings and several informal meetings to give interested parties an
opportunity to share advice and recommendations with the Department.
The hearings were held in Washington, DC, Chicago, and Los Angeles, and
we posted transcripts of those hearings to the Department's Information
for Financial Aid Professionals website (http://www.ifap.ed.gov).
We then published a second notice in the Federal Register (63 FR
71206, December 23, 1998) to announce the Department's intention to
establish four negotiated rulemaking committees to draft proposed
regulations implementing Title IV of the HEA. The notice announced the
organizations or groups believed to represent the interests that should
participate in the negotiated rulemaking process and announced that the
Department would select participants for the process from
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nominees of those organizations or groups. We requested nominations for
additional participants from anyone who believed that the organizations
or groups listed did not adequately represent the list of interests
outlined in section 492 of the HEA. Once the four committees were
established, they met to develop proposed regulations over the course
of several months, beginning in January.
The proposed regulations contained in this notice of proposed
rulemaking (NPRM) reflect the final consensus of the negotiating
committee, which was made up of the following members:
* American Association of Collegiate Registrars and
* Admissions Officers.
* American Association of State Colleges and Universities.
* American Council on Education.
* Career College Association.
* Consumer Bankers Association.
* Education Finance Council.
* Education Loan Management Resources.
* Guaranty Agency CEO Caucus.
* Legal Services Counsel (a coalition).
* National Association of Independent Colleges and
Universities.
* National Association of State Student Grant and Aid
Programs.
* National Association of State Universities and Land Grant
Colleges.
* National Association of Student Financial Aid
Administrators.
* National Association of Student Loan Administrators.
* National Council of Higher Education Loan Programs.
* National Direct Student Loan Coalition.
* Sallie Mae, Inc.
* State Higher Education Executive Officers Association.
* Student Loan Servicing Alliance.
* United States Department of Education.
* United States Student Association.
* US Public Interest Research Group.
As stated in the committee protocols, consensus means that there
must be no dissent by any member in order for the committee to be
considered to have reached agreement. Consensus was reached on all of
the proposed regulations in this document.
The committee that developed these proposed regulations focused on
issues unique to FFEL Program guaranty agencies and lenders,
particularly in the areas where changes were made to the HEA by the
1998 Amendments affecting guaranty agency financial restructuring.
Issues that affected Title IV borrowers in general, such as deferments,
cancellations, forbearances, loan amounts, interest rates, etc., were
addressed by another negotiating committee. However, the committee
agreed that if it completed its required work early, the negotiators
could propose changes to update or clarify other provisions in the
existing FFEL regulations that were not otherwise being modified as a
result of the 1998 Amendments. The committee reached consensus on its
required work early and, in response to proposals presented by various
negotiators, spent most of its last meeting looking at changes to other
regulatory provisions. Some of those additional changes were agreed to
by the committee and are included in these proposed regulations.
The goal of the negotiations was to develop an NPRM that reflected
a final consensus of the negotiating committee. The proposed
regulations in this document reflect that consensus. The following
discussion includes summaries of some of the points of view expressed
by the negotiators as they sought to reach consensus. This information
will assist you in understanding the rationale for some of these
proposed regulations.
The members of the committee represented lenders, loan servicers,
guaranty agencies, schools, students, and other interested parties from
various sectors of the FFEL Program and student aid community, as well
as the Secretary. We listened to the views and recommendations offered
by the other negotiators during the first meeting of the committee on
January 19-20, 1999, and prepared draft proposed regulations that were
provided to the other negotiators on February 12. The committee
discussed these draft regulations at the second meeting on February 16-
17. Taking into account the information provided at the February
meeting, we revised the draft proposed regulations and provided them to
the other negotiators on March 18. The committee discussed the revised
draft regulations during the third meeting on March 22-24, and
tentative agreement was reached on many issues.
Between the third and fourth meetings, we again revised the draft
proposed regulations and provided them to the other negotiators on
April 15. The negotiators discussed the revised draft regulations at
the fourth meeting, on April 19-20, and tentative agreement was reached
on the entire draft regulations, subject to the edits agreed to by the
negotiators. Those edits were incorporated into a new draft, which the
Department sent to the other negotiators on May 10. The last meeting of
the negotiated rulemaking committee was held May 17-18. On May 17,
after a few refinements to the draft language, the negotiators agreed
to the draft proposed regulations that they had developed without
dissent. After reaching consensus on the regulations that were required
to be developed as a result of the 1998 Amendments, the negotiators
then agreed to examine other existing regulations that some negotiators
believed should be modified. The following discussion of the proposed
regulations covers both sets of regulations: the regulations required
to implement the changes made to the HEA by the 1998 Amendments and
other regulations that the negotiators agreed to propose or revise.
Proposed Regulatory Changes
In accordance with the consensus reached in the negotiated
rulemaking, the Secretary proposes to amend the following sections of
the regulations:
Section 682.205 Disclosure Requirements for Lenders
The proposed regulations would implement the changes made by the
1998 Amendments to section 433 of the HEA. Those changes affect the
loan disclosures that a lender is required to provide to a borrower.
Specifically, the HEA now requires a lender to use simple and
understandable terms in its disclosure statements and to provide a
telephone number the borrower can use to obtain additional loan
information. The changes to the HEA also permit a lender to provide the
disclosure information and the lender's phone number electronically.
The negotiators reached consensus on these proposed regulations and
enhanced the telephone number requirement by requiring the lender to
provide a toll free number accessible within the United States.
Section 682.207 Due Diligence in Disbursing a Loan
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
The negotiators agreed to propose a change to the Secretary's
longstanding policy that a lender must cancel all future disbursements
on a loan whenever the first disbursement is returned to the lender.
Some negotiators argued that this policy encouraged borrowers to accept
loan funds they did not need at the beginning of a school year. Under
current policy, a borrower who realizes he or she does not need the
first disbursement of a loan and returns the unneeded funds to the
lender is
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required to reapply later in the year to obtain subsequent
disbursements that he or she does need. The extra paperwork and loan
processing creates an unnecessary burden on the borrower, the school,
the lender, and the guaranty agency. The proposed regulations would
leave in place the provision that when a disbursement is returned
because the student withdrew, the remaining disbursements are
cancelled. However, under the proposed regulations, in the absence of
information that the student is no longer enrolled, and at the request
of the school, a lender may disburse subsequent disbursements after the
first disbursement is returned to the lender.
Section 682.208 Due Diligence in Servicing a Loan
The proposed regulations would make changes to reflect the
establishment of a Student Loan Ombudsman's office in the Department,
as provided by section 141(f) of the 1998 Amendments. The Ombudsman's
office would provide informal resolution of complaints received from
Title IV loan borrowers.
The negotiators agreed that the FFEL Program regulations should
require schools, lenders, and guaranty agencies to inform borrowers of
the existence of the Department's Student Loan Ombudsman's office to
resolve disputes borrowers have regarding their FFEL Program loans. The
negotiators believed that a borrower should first try to resolve any
dispute with a lender or loan servicer on the assumption that many of
these disputes are simple misunderstandings. However, if the borrower
informs the lender or servicer in writing that he or she believes the
dispute has not been resolved, the lender or servicer would advise the
borrower to request the guaranty agency to settle the dispute. The
guaranty agency analyzes the information provided by the borrower and
other parties and notifies the borrower of its decision. If the
guaranty agency does not resolve the dispute, the agency's response
must provide the borrower with information about the Department's
Student Loan Ombudsman's office. The negotiators believed this process
would resolve the vast majority of disputes.
In addition to inserting this requirement in Sec. 682.208, the
negotiators also proposed adding a conforming requirement to
Sec. 682.411 so that the lender due diligence regulations would also
contain an Ombudsman notification provision. In addition, guaranty
agencies would be required to inform defaulted borrowers of the
availability of the Department's Student Loan Ombudsman's office. The
negotiators believed this notice to a student loan defaulter would be
most effective if it was part of the notification already required by
Sec. 682.410(b)(5) before a guaranty agency reports the borrower's
default to a credit bureau. Finally, although not part of the proposed
regulations developed by this negotiating committee, another
negotiating committee agreed to propose regulations requiring schools
to provide information about the Department's Student Loan Ombudsman's
office when providing exit counseling to borrowers.
Section 682.210 Deferment
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
These regulations propose to exclude in-school deferments from the
general requirement that a deferment may not be granted for a period
beginning more than 6 months before the date the lender receives the
request and the documentation required for the deferment. The
negotiators believed that the process for obtaining documentation to
support an in-school deferment is almost always beyond the student's
ability to control. Moreover, many students mistakenly assume that the
school notifies their lender that they are in-school. Taken together,
these factors have resulted in misunderstandings and technical problems
that have led to borrowers defaulting while they are enrolled in-school
and eligible for an in-school deferment.
Section 682.211 Forbearance
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
The proposed regulations would modify and incorporate into the
regulations the Secretary's policy of permitting lenders and guaranty
agencies to grant administrative forbearances to assist FFEL borrowers
who are residents of areas where natural disasters have occurred. Under
that policy, the Secretary notifies loan holders whenever the Federal
Emergency Management Agency (FEMA) designates an area eligible for
Federal assistance under FEMA's Individual Assistance Program. The
Secretary strongly recommends that loan holders grant forbearances to
borrowers who contact them and indicate that they have been adversely
affected by a natural disaster and need temporary relief from their
loan obligations. If the holder believes that the borrower has been
harmed and needs assistance, the holder may grant a forbearance for up
to 3-months based on the borrower's oral or written request for
assistance, which must be documented in the holder's files. The holder
does not need to obtain supporting documentation or a signed written
agreement from the borrower to justify a forbearance for this initial
3-month period. However, a continuation of the forbearance past this 3-
month period would require supporting documentation and a written
agreement from the borrower.
The proposed regulations would modify that policy by allowing loan
holders to determine if a natural disaster had occurred that affected
the borrower's ability to make payments on the loan. If the holder made
that determination, it could grant an administrative forbearance to the
borrower for up to 3 months consistent with the Secretary's previously
described policy. The determination of whether a borrower is covered by
a natural disaster would be made by the loan holder, with no
requirement that the disaster area be covered under FEMA's Individual
Assistance Program. Because loan holders would decide whether a
borrower is covered by a natural disaster, the Secretary would no
longer need to notify loan holders about the numerous disaster areas
designated by FEMA each year. In addition, the forbearance would not be
limited only to residents of the disaster area, but could include, at
the holder's discretion, borrowers who were adversely affected by the
disaster even if they lived outside the disaster area. For example, if
the county where the borrower resides suffers no actual damage from
tornadoes that destroy the borrower's place of employment in an
adjoining county, the forbearance would be permitted. Under the
proposed regulations, the determination of whether the borrower was
affected by a natural disaster would be made by the holder of the loan,
and the Secretary would not challenge a holder's reasonable exercise of
that judgment.
The proposed regulations would also allow a lender to grant an
administrative forbearance to resolve a borrower's delinquency that
existed at the beginning of a mandatory administrative forbearance
period under Sec. 682.211(j)(2). These forbearances apply whenever the
lender is notified by the Secretary that--
* Exceptional circumstances exist, such as a local or
national emergency or military mobilization; or
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* The geographic area in which the borrower or endorser
resides has been designated as a disaster area by the President of the
United States or Mexico, the Prime Minister of Canada, or a Governor of
a State.
Section 682.215 Federal Stafford Loan Forgiveness Demonstration
Program
The Federal Stafford Loan forgiveness demonstration program was
established under section 428J of the HEA by the Higher Education
Amendments of 1992. The loan forgiveness program was never implemented
because funds were never appropriated for the program. With the
enactment of the 1998 Amendments, the Federal Stafford Loan forgiveness
demonstration program was replaced by a new section 428J titled ``Loan
forgiveness for teachers.'' Consequently, the regulations currently in
Sec. 682.215 for the Federal Stafford Loan forgiveness demonstration
program are no longer needed and would be deleted.
Section 682.302 Payment of Special Allowance on FFEL Loans
The proposed regulations would implement the requirements of
section 438(b)(2)(H) of the HEA, which modified the statutory formula
for calculating the amount of special allowance payable on an FFEL
Program loan. Previously, the general formula subtracted the applicable
interest rate on the loan from the average of the 91-day Treasury bills
auctioned during a quarter, and a special allowance factor of 3.1
percent was added to the result. That calculation produced an
annualized special allowance rate, which was then divided by four to
determine the special allowance paid to the lender for that quarter.
The changes made by section 438(b)(2)(H) of the HEA reduced the special
allowance factor from 3.1 percent to 2.8 percent, with a further
reduction to 2.2 percent during the in-school, grace, and deferment
periods. For example, under the new formula, if the 91-day Treasury
bill average for a quarter was 5.4 percent and the applicable interest
rate on a loan was 7.4 percent, the special allowance calculation for a
loan in repayment and not in deferment would be:
(5.4 - 7.4) + 2.8 4 = 0.2 percent
In addition to reflecting the previously described revisions, these
proposed regulations also reflect the changes made to the HEA relating
to the special allowance calculation for loans made or purchased with
the proceeds of tax-exempt funds. More specifically, these proposed
regulations specify which loans qualify for the minimum (or floor)
special allowance rate and are subject to the 50 percent limitation on
the maximum special allowance rate.
Section 682.305 Procedures for Payment of Interest Benefits and
Special Allowance and Collection of Origination and Loan Fees
The proposed regulations would implement sections 438(c), 438(d),
and 428(b)(1)(U)(iii)(I) of the HEA, requiring the Secretary to collect
origination fees owed by a lender by offsetting the amount of interest
and special allowance payments due the lender or by collecting the
amount of origination fees directly from the lender.
Under the proposed regulations, if the full amount of origination
and loan fees cannot be collected from the originating lender and the
loan has been transferred to a subsequent holder, the Secretary may,
following written notice, collect the fees from the subsequent holder.
To ensure that originating lenders report origination and loan fees due
the Secretary, the negotiators proposed that all participating lenders
be required to submit a quarterly ED Form 799 (request for interest and
special allowance), or comply with whatever successor process to the ED
Form 799 may exist in the future. These proposed regulations would
require lenders to report quarterly even if the lender is not owed, or
does not wish to receive, interest benefits or special allowance
payments from the Secretary.
Section 682.400 Agreements Between a Guaranty Agency and the
Secretary
The proposed regulations would delete the reference to the payment
of administrative cost allowances to guaranty agencies. Those
allowances were eliminated by the 1998 Amendments.
Section 682.401 Basic Program Agreement
The proposed regulations would implement changes made by the 1998
Amendments to sections 422(c)(6)(B)(i) and 428(j)(3) of the HEA. The
negotiators agreed to propose that guaranty agencies be required to
receive and respond to written, electronic, and telephone inquiries.
A guaranty agency must ensure that it or an eligible lender as
described in section 435(d)(1)(D) of the HEA serves as a lender-of-
last-resort in the State in which the guaranty agency is the designated
guaranty agency. The designated guaranty agency is the guaranty agency
with which the Secretary has signed a Basic Program Agreement under
Sec. 682.401 to serve the State. The guaranty agency or the lender-of-
last-resort may arrange lender-of-last-resort loans to be made by
another eligible lender. The proposed regulations specify which loans a
lender-of-last-resort is required to make in order to satisfy its
statutory obligation. In addition, the proposed regulations provide a
lender-of-last-resort with authorization to expand its lender-of-last-
resort program to borrowers other than those it is required to serve to
meet its statutory obligation.
The proposed regulations describe the procedures that would be used
by the Secretary to determine which guaranty agencies would receive
Federal funds to be used to make lender-of-last-resort loans. A
guaranty agency using Federal funds would be required to provide
lender-of-last-resort subsidized and unsubsidized Federal Stafford
loans and Federal PLUS loans to borrowers who are otherwise unable to
obtain loans under the agency's lender-of-last-resort program. The
funds would be advanced on terms and conditions agreed to by the
Secretary and the agency if the Secretary determines that--
* Eligible borrowers in a State who qualify for subsidized
Federal Stafford loans are seeking and are unable to obtain subsidized
Federal Stafford loans;
* The guaranty agency designated for that State has the
capability to provide lender-of-last-resort loans in a timely manner,
either directly or indirectly using a third party, but cannot do so
without Federal capital; and
* It would be cost effective to advance Federal funds to the
agency.
The Secretary may provide Federal funds to another guaranty agency,
other than the designated agency, to serve a State if the Secretary
determines that the designated guaranty agency does not have the
capability to provide lender-of-last-resort loans in a timely manner or
that it would not be cost effective to provide Federal funds to the
designated agency.
In the area of prohibited inducements, the proposed regulations
prohibit a guaranty agency from mailing or otherwise distributing
unsolicited loan applications to students enrolled in a secondary
school or a postsecondary institution, or to parents of those students,
unless the potential borrower has previously received loans insured by
the guaranty agency.
The negotiators extensively discussed the change made to section
428(b)(3) of the HEA. For many years, there has been a regulatory
prohibition, based on section 428(b)(3) of the HEA, against a guaranty
agency's offering, directly or indirectly, any premium, payment, or
other inducement to an employee or
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student of a school, or an entity or individual affiliated with a
school, to secure applicants for FFEL Program loans. The statutory
prohibition was amended by the 1998 Amendments by adding an exception
so that it would not be considered a prohibited inducement for a
guaranty agency to provide assistance to schools comparable to the
kinds of assistance provided by the Secretary. The Department took the
view that the intent of the provision is to provide the exception to
assistance comparable to the kinds of assistance provided by the
Secretary to schools under the Federal Direct Loan Program. Some
negotiators argued that the Secretary could provide assistance under
one of the many programs administered by the Department that could also
benefit Federal Direct Loan schools' administration of the program.
After discussion, the negotiators agreed that it would not be a
prohibited inducement for a guaranty agency to provide assistance to
schools comparable to the kinds of assistance provided by the Secretary
to schools under, or in furtherance of, the Federal Direct Loan
Program.
Section 682.402 Death, Disability, Closed School, False Certification,
and Bankruptcy Payments
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
The proposed regulations would make it easier for some borrowers to
obtain closed school discharges of their loan obligations. Current
regulations require a borrower to file an application if the borrower
wants a discharge of his or her loan obligation based on the school
closure. Under the proposed regulations, the Secretary or a guaranty
agency may discharge a borrower's FFEL Program loan, without an
application, if the borrower's loan was made for the same program of
study and time period at the same school as a loan for which the
borrower has qualified for and received a closed school discharge under
the Federal Perkins Loan Program or the Federal Direct Loan Program. In
addition, the Secretary, or a guaranty agency with the Secretary's
approval, may discharge a borrower's FFEL Program loan, without an
application, if the borrower qualifies for a discharge based on
information in the Secretary's or guaranty agency's possession that
would satisfy the conditions for discharging the borrower's loan
obligation.
The proposed regulations also permit a lender to suspend collection
efforts against an endorser (or other party that is secondarily liable)
on a loan if the borrower files a petition for relief in bankruptcy.
Lenders are required by the Bankruptcy Code to immediately suspend any
collection efforts outside the bankruptcy proceeding against the
individual who has filed. Lenders have been required by the FFEL
regulations to continue collection efforts against an endorser who has
not filed for bankruptcy. The non-Federal negotiators believed that
this situation creates complicated servicing issues for a lender or
guaranty agency and creates confusion among participants. The proposed
regulations would provide for more consistent treatment of borrowers
and endorsers when the borrower files a bankruptcy petition.
Section 682.404 Federal Reinsurance Agreement
The Secretary proposes to modify Sec. 682.404 to reflect sections
422A, 422B, 428(c)(1), 428(c)(6), 428(c)(9)(A), 428(f), 428(l),
438(c)(2)(H)(ii), and 458 of the HEA, as added or modified by the 1998
Amendments.
These proposed regulations reflect the changes made by the 1998
Amendments to the reinsurance rates paid on a defaulted loan for which
the first disbursement was made on or after October 1, 1998.
Section 682.404(g) describes the portion of borrower payments on
defaulted loans that guaranty agencies are required to return to the
Secretary. Specifically, the Secretary is entitled to a share of
borrower payments on default claims paid using assets of the Federal
Fund. The 1998 Amendments reduced the portion of collections on
defaulted loans that a guaranty agency may retain and specified that
the guaranty agency share must be deposited into the agency's Operating
Fund. Under current regulations, guaranty agencies are authorized to
retain a portion of borrower payments received on defaulted loans on
which the Secretary has paid a reinsurance claim. Thus, if a borrower
payment is received by a guaranty agency after the default claim was
paid but before reinsurance is paid, the guaranty agency may not retain
any portion of the payment. In addition to reflecting the reduced
percentage a guaranty agency is authorized to retain, the Secretary is
also proposing to permit guaranty agencies to retain that portion of
collections on default claims paid using assets of the Federal Fund
instead of default claims on which reinsurance has been paid. The
Secretary believes this change would provide guaranty agencies with an
incentive to promptly pursue collections on defaulted loans.
Section 682.404(k) of the proposed regulations addresses the
default aversion fee. The default aversion fee is part of the new
funding model established by the 1998 Amendments for guaranty agencies.
The fee is designed to provide an incentive for guaranty agencies to
provide effective default aversion efforts and lower default costs.
Section 428(l) of the HEA authorizes the payment of a default
aversion fee to a guaranty agency if the agency is instrumental in
averting a default by a borrower who becomes 60 days delinquent in
repaying a loan. Section 428(l)(2) of the HEA permits a guaranty agency
to transfer a default aversion fee from the Federal Fund to the
agency's Operating Fund for any loan on which a claim for default has
not been paid as a result of the loan being brought into current
repayment status by the guaranty agency on or before the 360th day of
delinquency. For purposes of a guaranty agency's earning the default
aversion fee, section 428(l)(2)(C) of the HEA defines the term
``current repayment status'' as ``* * * the borrower is not delinquent
in the repayment of any principal or interest on the loan.''
The negotiators agreed that a borrower who pays all past due
amounts should be considered in current repayment status, but there was
considerable debate concerning other conditions under which the
borrower should be considered as in ``current repayment status.'' In
particular, the issue of whether a borrower who was granted forbearance
by the lender to resolve a delinquency should be considered ``current
repayment status'' for purposes of earning the default aversion fee was
extensively discussed. Some negotiators were concerned that if granting
forbearance earned the guaranty agency the default aversion fee,
without regard to the borrower's later default, guaranty agencies would
have an economic incentive to encourage lenders to be less diligent in
determining the appropriate use of forbearances. Thus, some negotiators
objected that this practice could result in forbearances delaying
defaults but not preventing them.
Guaranty agency representatives stated that they would not be
motivated by a financial incentive to earn the maximum amount of income
from default aversion fees. They maintained that the potential amount
they would earn (one percent of the loan balances) would be less than
their costs in providing default aversion assistance. A proposal to
track loans brought into
[[Page 42181]]
``current repayment status'' through the granting of forbearance, such
that the guaranty agency would earn the default aversion fee only on
those that remained current for some period of time following the end
of the forbearance period, was discussed extensively. Although the
guaranty agency representatives were supportive of the concept, they
expressed concern about the expense associated with making system
modifications necessary to track individual loans.
After considerable discussion on this topic among the negotiators,
those negotiators representing guaranty agencies proposed a compromise
approach that resulted in a consensus on this issue. Under the proposed
regulations, a guaranty agency could transfer its calculated net amount
of default aversion fees from its Federal Fund to its Operating Fund in
response to lender requests for default aversion assistance on
delinquent loans. However, if a loan on which the agency has received
the default aversion fee is subsequently paid as a default claim, the
agency must rebate funds to the Federal Fund. The fees may be
transferred from the Federal Fund to the Operating Fund no more
frequently than monthly, may not be paid more than once on any loan,
and must be equal to the net amount of--
* One percent of the unpaid principal and accrued interest
on loans at the time the request for default aversion assistance is
submitted by lenders to the agency during a given time period; minus
* One percent of the unpaid principal and accrued interest
owed by borrowers on default claims paid by the agency during the same
time period for which the fees are transferred.
Thus, if the guaranty agency is successful in assisting delinquent
borrowers to avoid default, the default aversion fees are retained by
the agency. However, if a delinquent borrower for whom the agency has
received the default aversion fee subsequently defaults, the guaranty
agency must return to the Federal Fund 1 percent of the outstanding
principal and accrued interest owed by the borrower. Accordingly, if
the borrower does not make any intervening payments on the loan, the
agency would be required to return an amount to the Federal Fund for
that borrower that is greater than the amount originally received from
the Federal Fund. The returned amount would be increased by 1 percent
of the interest that accrues from the date the lender submitted the
default aversion request until the date the agency pays the default
claim to the lender. The Secretary believes the return of this
increased amount fairly compensates the Federal Fund for the loss of
the funds for the time period they were held by the guaranty agency in
its Operating Fund. The committee concluded that this gross basis
calculation of the default aversion fee payments results in default
aversion fee payments equivalent to the amount specified in section
428(l) of the HEA without requiring a loan-by-loan tracking. In
addition, the negotiators agreed that this approach is consistent with
the intent of the statute and creates positive incentives for guaranty
agencies to aggressively pursue default reduction.
The proposed regulations would also permit a lender to submit a
request for default aversion assistance during the 60th day through the
120th day of the borrower's delinquency. If a lender submits the
request after the 120th day of delinquency, the guaranty agency must
provide the default aversion assistance for which it may receive the
default aversion fee.
Finally, the proposed regulations include requirements that govern
who can be hired to collect loans on which default aversion assistance
payments have been made. Other than the guaranty agency, which is
statutorily authorized to perform both roles, the same party may not
perform default aversion assistance on a loan and collect on that loan
during a 3-year period following the date a default claim is paid.
Because the compensation for collecting on a defaulted loan is usually
much greater than that received for preventing default, this regulatory
provision is intended to prevent corruption of the default aversion
process.
Section 682.406 Conditions for Claim Payments From the Federal Fund
and for Reinsurance Coverage
The proposed regulations reflect the changes made by the 1998
Amendments to section 428(c)(2) of the HEA. The negotiators agreed that
a default claim should be paid only if diligent attempts were made by
the lender and guaranty agency to locate the borrower through the use
of effective commercial skip tracing techniques, including contact with
the school the student attended. Further, as a condition for receiving
a reinsurance payment, the guaranty agency must certify to the
Secretary that those diligent skip-tracing efforts were made.
Section 682.409 Mandatory Assignment by Guaranty Agencies of Defaulted
Loans to the Secretary
The proposed regulations reflect the changes made by the 1998
Amendments to section 428(c)(8) of the HEA to the standards for
requiring mandatory assignment of defaulted loans by removing the
transition to the Federal Direct Loan Program as one of the criteria.
Section 682.410 Fiscal, Administrative, and Enforcement Requirements
The proposed regulations would make a change to Sec. 682.410 to
reflect the establishment of a Student Loan Ombudsman's office in the
Department. The proposed changes to Sec. 682.410(b)(5) would add a
requirement that a guaranty agency must inform the borrower that the
Department's Student Loan Ombudsman's office is available as a dispute
resolving office before the agency reports the borrower's default to a
credit bureau.
Section 682.411 Lender Due Diligence in Collecting Guaranty Agency
Loans
The proposed changes to this section would add a provision in
Sec. 682.411(b)(3) requiring a lender to inform a delinquent borrower
that the Department's Student Loan Ombudsman's office is available as a
dispute resolving office. Under the proposed regulations, a lender's
failure to inform a borrower about the availability of the Student Loan
Ombudsman's office would not be considered a violation of the lender
due diligence requirements in Sec. 682.411 that would cause the loan to
lose insurance or reinsurance coverage.
The proposed regulations also implement the requirements of
sections 428(c)(2) and 435(l) of the HEA, as modified by the 1998
Amendments. Prior to the enactment of the 1998 Amendments, section
435(l) of the HEA defined ``default'' in the FFEL Program as a
delinquency that persisted for 180 days for loans scheduled to be
repaid in monthly installments, and 240 days for loans scheduled to be
repaid in less frequent installments. This definition was changed by
the 1998 Amendments to 270 days and 330 days, respectively, for loans
for which the first day of the 270/330-day delinquency period occurs on
or after October 7, 1998. These proposed regulations would change the
due diligence requirements for lenders to accommodate this new
definition of default.
A lender must send a final demand letter to a delinquent borrower
at least 31 days before filing a claim with the guaranty agency. When
the definition of default was 180/240 days, the final demand letter was
sent on or after the 151st/211th day of delinquency. Accordingly, these
proposed regulations
[[Page 42182]]
move the timing of the final demand letter to have it sent on or after
the 241st day of delinquency, or the 301st day if the loan was
scheduled to be repaid less frequently than monthly.
The negotiators also discussed the collection activities that
should be required during the additional 90 days of delinquency prior
to default. The proposed regulations preserve the current regulatory
prohibition against any ``gap'' in collection efforts that exceed 45
days (or 60 days for loans being transferred from one lender or
servicer to another). However, other than the timing of the final
demand letter, the proposed regulations do not make any additional
changes to Sec. 682.411 at this time (other than including notification
of the Ombudsman, as discussed earlier).
The proposed regulations require a lender to request default
aversion assistance not earlier than the 60th day and no later than the
120th day of delinquency. If a lender fails to request default aversion
assistance between the 60th and 120th day of delinquency, and the
lender later submits a claim on that loan, the lender would be subject
to the interest penalty described in section I.C.3.b. of Appendix D to
Part 682. A default aversion assistance request must be made before the
330th day of delinquency. If the lender fails to request default
aversion assistance by the 330th day, the Secretary will not pay any
accrued interest, interest benefits, and special allowance for the most
recent 270 days prior to default.
The current due diligence requirements in Sec. 682.411 provide for
a detailed set of requirements pertaining to the collection of
delinquent loans by lenders. The Department and the FFEL community are
interested in moving toward a performance-based model for due
diligence. Thus, the Secretary provides notice that the Department will
entertain proposals from FFEL participants to exercise the Secretary's
authority to waive potential liabilities in conjunction with approved
experiments with performance-based approaches to default prevention.
The Secretary will evaluate proposals and may authorize the
implementation of one or more experiments to test new performance-based
approaches to default prevention. The Secretary encourages FFEL
participants to consider proposals that create positive incentives for
default prevention and that incorporate collection approaches that have
been used successfully in the private sector.
Section 682.412 Consequences of the Failure of a Borrower or Student
To Establish Eligibility
The proposed regulations make a conforming change to reflect a
revised regulatory citation for the final demand letter required by
Sec. 682.411(f).
Section 682.413 Remedial Actions
The proposed regulations would amend this section to reflect
changes made to section 428(c)(9)(I) of the HEA by the 1998 Amendments.
The HEA provides that the Secretary's decision to terminate a guaranty
agency's participation in the FFEL Program after September 24, 1998,
based on certain failures specified in the HEA, does not become final
until the Secretary provides the agency with an opportunity for a
hearing on the record. The HEA requires a hearing on the record only in
those cases in which the proposed termination is based on the specific
grounds included in section 428(c)(9) of the HEA. The Department's
regulations have long identified other grounds on which a guaranty
agency's participation could be terminated, and the Department could
have applied the new statutory requirement to only the limited number
of statutory terminations. The Secretary suggested, however, that the
hearing on the record requirement apply to any proposed termination
action against a guaranty agency, and the committee agreed to this
expansion.
Section 682.414 Records, Reports, and Inspection Requirements for
Guaranty Agency Programs
Although the proposed regulations in this section do not implement
changes made by the 1998 Amendments, the negotiators agreed to propose
them as improvements to the existing FFEL Program regulations.
The Secretary published final regulations in the Federal Register
(61 FR 60490, November 27, 1996) reducing the 5-year record retention
requirement for schools to 3 years as a result of changes made to the
General Education Practices Act (GEPA) by the Improving America's
Schools Act of 1994 (Pub. L. 103-382). At that time, the Secretary
received requests that the 5-year record retention requirement for
lenders be similarly reduced. The Secretary declined to do so and noted
that the GEPA changes did not apply to lenders in the FFEL Program.
However, the Secretary made a commitment to consider a future
reduction in lender record retention requirements in the interest of
reducing lender burden. The proposed regulations reduce the length of
time a lender must retain required loan records for loans paid in full
by the borrower from 5 years to 3 years from the date the loan is
repaid in full by the borrower. For all other loans for which the
lender receives payment in full from any other source (for example, a
claim payment or a consolidation payoff), or for those loans that are
not paid in full, the 5-year retention period will continue to be in
effect, except that in particular cases, the Secretary or the guaranty
agency may require the retention of records beyond the 3-year or 5-year
minimum periods. The Secretary notes that a guaranty agency could serve
as a lender's agent for the purpose of maintaining the lender's records
for the required time periods. The Secretary believes that the limited
exception to the 5-year rule included in these proposed regulations
would not interfere with appropriate program administration.
Section 682.417 Determination of Federal Fund or Assets To Be Returned
The changes in these proposed regulations are needed to conform
this section to the new financial structure for guaranty agencies under
section 422A of the HEA, which was added to the HEA by the 1998
Amendments. The Secretary proposes to change all references to
``reserve funds'' (or ``reserve fund'') in Sec. 682.417 to ``Federal
Fund'' to reflect the new financing model established by the 1998
Amendments. As this is done, minor grammatical changes will be made to
the current regulations to accommodate the switch from the plural form
of ``reserve funds'' to the singular form of ``Federal Fund.''
Section 682.418 Prohibited Uses of the Assets of the Operating Fund
During Periods in Which the Operating Fund Contains Transferred Funds
Owed to the Federal Fund
The proposed regulations would implement the requirements of
section 422B(e)(3)(B) of the HEA, which authorizes the Secretary to
regulate the uses or expenditures of a guaranty agency's Operating Fund
during any period in which funds transferred from the Federal Fund are
in the Operating Fund. The negotiators agreed that the restrictions
governing the use of the reserve fund in Sec. 682.418 would be
acceptable restrictions for the use of the Operating Fund during these
periods. Changing the references to ``reserve fund'' in the existing
Sec. 682.418 to ``Operating Fund'' required no new regulations.
[[Page 42183]]
Section 682.419 Guaranty Agency Federal Fund
The proposed regulations reflect section 422A of the HEA, as added
by the 1998 Amendments, which requires each guaranty agency to
establish a Federal Student Loan Reserve Fund (the ``Federal Fund'')
within 60 days of enactment of the 1998 Amendments.
On January 27, 1999, the Secretary issued a ``Dear Colleague
Letter'' (99-G-316) that provided the Secretary's initial guidance to
the guaranty agencies concerning the implementation of the new guaranty
agency funding model. Specifically, among other issues, the Secretary
stated ``* * * all of the funds, securities, and other liquid assets in
the agency's reserve fund as of September 30, 1998, as described in 34
CFR 682.410(a), must be deposited into the Federal Fund when it is
established.'' The committee agreed that the date to be used for
determining the amount of Federal reserve fund assets to be deposited
into the newly established Federal Fund should not be included in these
proposed regulations since that date was relevant at only one point in
time.
In addition to other receipts, as specified in the Department's
regulations, the HEA requires a guaranty agency to deposit revenue from
the following sources into the Federal Fund:
* Default reinsurance payments received from the Secretary.
* A percentage of collections equal to the complement of the
reinsurance percentage paid on a defaulted loan.
* Insurance premiums collected from borrowers pursuant to
Sec. 428(b)(1)(H) and Sec. 428H(h) of the HEA.
* All amounts received from the Secretary as payment for
supplemental preclaims activity performed on or before September 30,
1998.
* 70 percent of amounts received on or after October 1,
1998, as payment for administrative cost allowances for loans upon
which insurance was issued on or before September 30, 1998.
The negotiators also agreed that, in addition to the deposits
specifically listed in the HEA, the proposed regulations should also
require the following other amounts to be deposited into the Federal
Fund:
* Payments made to the agency by the Secretary on death,
disability, bankruptcy, and loan cancellation and discharge claims.
* All funds received by the guaranty agency from any source
(including collections from defaulted borrowers) on FFEL Program loans
on which the Secretary has paid a claim, minus the portion the agency
is authorized to deposit in its Operating Fund.
* Investment earnings on the Federal Fund assets.
* Revenue derived from the Federal portion of a nonliquid
asset, in accordance with Sec. 682.420.
* Other funds received by the guaranty agency from any
source that are specifically designated for deposit in the Federal
Fund.
As written, section 422A(d) of the HEA would permit the assets of
the Federal Fund to be used only to pay lender claims and to transfer
earned default aversion fees to the agency's Operating Fund. However,
other provisions of the HEA authorize or require that the Federal Fund
be used for other purposes. These proposed regulations recognize that
the Federal Fund has to be used for other purposes, including--
* Transferring account maintenance fees to the agency's
Operating Fund, if directed by the Secretary;
* Refunding payments made by or on behalf of a borrower on a
loan that has been discharged due to death, disability, bankruptcy,
closed school, false certification, or unpaid refund, in accordance
with Sec. 682.402;
* Paying the Secretary's share of collections on defaulted
loans, in accordance with Sec. 682.404(g);
* Transferring funds to the agency's Operating Fund,
pursuant to Sec. 682.421;
* Refunding insurance premiums related to loans cancelled or
refunded, in whole or in part;
* Returning to the Secretary portions of the Federal Fund
required to be returned by law; and
* Any other purpose authorized by the Secretary.
The Federal Fund (and amounts in the Operating Fund that are
transferred from the Federal Fund) must be invested in securities
issued or guaranteed by the United States or a State or, with the
approval of the Secretary, in other similarly low-risk securities
selected by the guaranty agency. Guaranty agencies that have invested
the Federal reserve funds in ``pooled'' investments as part of a State
investment program may continue using that investment vehicle for the
new Federal Fund without requesting specific approval from the
Secretary. Earnings on the investment of the Federal Fund are the sole
property of the Federal Government.
Guaranty agencies serve as fiduciaries in safeguarding Federal
assets and funds entrusted to their care. Thus, guaranty agencies may
not use assets of the Federal Fund for any purpose not authorized by
the HEA or the Secretary. Consistent with this obligation, the proposed
regulations provide that a guaranty agency may not prepay obligations
of the Federal Fund unless it demonstrates, to the satisfaction of the
Secretary, that the prepayment is in the best interests of the United
States.
The HEA requires a guaranty agency to maintain a minimum Federal
Fund level equal to at least 0.25 percent. For the purpose of
calculating this ratio, these proposed regulations provide that the
numerator is the total assets of the Federal Fund including the amount
of funds transferred from the Federal Fund that are in the Operating
Fund, using an accrual basis of accounting. The denominator in the
above ratio is the original principal amount of loans outstanding and
guaranteed by the agency.
Section 682.420 Federal Nonliquid Assets
The proposed regulations reflect section 422A of the HEA, as added
by the 1998 Amendments, that restates the longstanding principle that
the Federal Fund, and nonliquid assets (such as buildings or equipment)
developed or purchased by an agency in whole or in part with Federal
reserve funds, regardless of who holds or controls the Federal reserve
funds or assets, are the property of the United States. Under the 1998
Amendments, the ownership of an asset is prorated based on the
percentage of the asset developed or purchased with Federal funds.
Section 422A of the HEA, on its face, appears to limit the use of
the Federal portion of nonliquid assets to the payment of claims to
lenders and the transfer of default aversion fees to the Operating
Fund. Such a literal reading of the statute would prohibit an agency
from using the Federal portion of nonliquid assets (such as a computer
or building) for any other purpose and would significantly burden the
guaranty agency's performance of its responsibilities as a guaranty
agency in the FFEL Program. The HEA authorizes the Secretary to
restrict or regulate the use of the Federal portion of nonliquid assets
to the extent necessary to reasonably protect the Federal share of the
value of those assets. The Federal regulations in effect prior to the
1998 Amendments authorized guaranty agencies to use the Federal portion
of nonliquid assets for other allowable purposes, and the negotiators,
including the Secretary, agreed to propose a continuation of that
policy. In addition, the negotiators agreed to propose that, if a
guaranty agency uses the Federal portion of a nonliquid asset (other
than an intangible or intellectual property asset or a tangible asset
of nominal value) in the performance of its guaranty
[[Page 42184]]
activities, the agency must promptly deposit into the Federal Fund an
amount representing the net fair value of the use of the asset. The net
fair value is the amount that would be paid to use a similar non-
Federal asset, minus amounts paid by the agency for expenses that
normally would be paid by the owner of the asset.
Guaranty agencies must exercise the level of care required of a
fiduciary charged with protecting, investing, and administering the
property of others in maintaining and using the Federal portion of
nonliquid assets under their control. Accordingly, if the guaranty
agency converts the Federal portion of a nonliquid asset, in whole or
in part, to a use unrelated to its guaranty activities, the agency
promptly must deposit into the Federal Fund a fair percentage of the
fair market value or, in the case of a temporary conversion, the net
fair value of the portion of the asset employed for the unrelated use.
Section 682.421 Funds Transferred From the Federal Fund to the
Operating Fund by a Guaranty Agency
The proposed regulations reflect section 422A(f) of the HEA, as
added by the 1998 Amendments, permitting a guaranty agency to transfer
a limited amount of funds from the Federal Fund for deposit into the
agency's Operating Fund. Upon receiving the Secretary's approval, an
agency may transfer from the Federal Fund an amount up to the
equivalent of 180 days of cash expenses (not including claim payments)
for normal operating expenses for deposit into the agency's Operating
Fund. The amount transferred and outstanding at any time during the
first 3 years after establishing the Operating Fund may not exceed the
lesser of 180 days cash expenses (not including claim payments) or 45
percent of the balance in the Federal reserve fund that existed under
Sec. 682.410 as of September 30, 1998. During any period that an
agency's Operating Fund contains funds transferred from its Federal
Fund, the Operating Fund may be used only as permitted by
Sec. 682.410(a)(2) and Sec. 682.418.
The negotiators agreed on the application procedures that guaranty
agencies are to use in requesting approval to transfer funds from their
Federal Funds to their Operating Funds. Specifically, a guaranty agency
must provide the Secretary with an application containing the
following:
* A request for the transfer that specifies the desired
amount, the date the funds will be needed, and the agency's proposed
terms of repayment.
* A projected revenue and expense statement, to be updated
annually during the repayment period, that demonstrates that the agency
will be able to repay the transferred amount within the repayment
period requested by the agency.
* A certification by the agency that, during the period the
transferred funds are outstanding, sufficient funds will remain in the
Federal Fund to pay lender claims.
* A certification by the agency that it will be able to meet
the reserve recall requirements of section 422 of the HEA, and the
statutory minimum reserve level of 0.25 percent, as mandated by section
428(c)(9) of the HEA.
* A certification by the agency that no legal prohibition
exists that would prevent the agency from obtaining or repaying the
transferred funds.
Section 422A(f)(2) of the HEA also authorizes the Secretary to
permit a limited number of guaranty agencies, in certain limited cases,
to transfer an amount greater than 180 days of operating expenses (not
including claim payments). The Secretary may authorize an agency to
exceed the 180-day limit by the amount of income earned on the
investment of the Federal Fund during the 3-year period following
October 7, 1998 (the date of enactment of the 1998 Amendments.) During
any period that an agency's Operating Fund contains funds transferred
from its Federal Fund, the Operating Fund may be used only as permitted
by Sec. 682.410(a)(2) and Sec. 682.418.
To obtain approval to transfer the investment income, an agency
must have transferred, and have outstanding, the maximum amount it is
otherwise eligible to transfer. In addition to the previously listed
application items required for transferring principal amounts from the
Federal Fund, an agency seeking to transfer investment income must
demonstrate to the Secretary that the cash flow in the Operating Fund
will be negative without the transfer of the investment earnings of the
Federal Fund and that the transfer of those earnings will substantially
improve the financial circumstances of the guaranty agency.
If the Secretary has neither approved nor disapproved a guaranty
agency's requested transfer of principal or the investment earnings of
the Federal Fund within 30 days after receiving the previously
described application items, the agency may proceed with the transfer.
The Secretary recognizes that guaranty agencies may have
transferred funds from the Federal Fund to the Operating Fund as a
working capital reserve before receiving the Department's January 27,
1999 ``Dear Colleague Letter'' (99-G-316) guidance concerning the
implementation of the new guaranty agency funding model. A guaranty
agency that transferred funds (that are still outstanding) without
obtaining the Secretary's approval prior to receiving the Department's
guidance will be held harmless, subject to the agency providing the
Secretary with the previously described application material. Agencies
that transferred Federal Fund assets into their Operating Funds are
requested to provide the required application material within 60 days
following publication of these proposed regulations.
Section 682.422 Guaranty Agency Repayment of Funds Transferred From
the Federal Fund
The proposed regulations would implement the requirements of
section 422A(f) of the HEA, as added by the 1998 Amendments.
Except in regard to the repayment of investment earnings
transferred from the Federal Fund to the Operating Fund, the HEA
requires an agency to begin repayment of principal transferred from the
Federal Fund not later than the start of the fourth year after the
establishment of the Operating Fund. All amounts transferred must be
repaid in full not later than 5 years after the date the Operating Fund
is established.
Generally, a guaranty agency must repay investment earnings
transferred under section 422A(f)(2) of the HEA within 2 years. The HEA
authorizes the Secretary to extend the period for repayment of
investment earnings from 2 years to 5 years if the Secretary determines
that the cash flow of the agency's Operating Fund will be negative if
the transferred investment earnings were required to be repaid earlier
or the repayment of the earnings would substantially diminish the
financial circumstances of the agency. To receive an extension, the
agency must demonstrate that it will be able to repay all transferred
funds by the end of the eighth year following the date of establishment
of the Operating Fund and that the agency will be financially sound
upon the completion of repayment. Repayment of amounts transferred from
the Federal Fund pursuant to section 422A(f)(2) of the HEA that are
repaid during the sixth, seventh, and eighth years following the
establishment of the Operating Fund must include the amount
transferred, plus any income earned after the fifth year from the
investment of the transferred amount. In determining the amount of
income earned on the
[[Page 42185]]
transferred amount, the negotiators agreed that the proposed
regulations should provide that the Secretary will use the average
investment income earned on all the agency's investments, including
investments that are not part of the agency's Operating Fund.
In accordance with section 422A(f) of the HEA, if an agency fails
to make a scheduled repayment to the Federal Fund, the agency may not
receive any other Federal funds until the agency becomes current in
making all scheduled payments, unless the Secretary waives this
restriction.
Section 682.423 Guaranty Agency Operating Fund
The proposed regulations would implement section 422B of the HEA,
as added by the 1998 Amendments, which requires each guaranty agency to
establish a fund designated as the ``Operating Fund'' within 60 days
after the enactment of the 1998 Amendments. The Operating Fund must be
in an account that is separate from the Federal Fund. The HEA requires
an agency to deposit into the Operating Fund:
* Loan processing and issuance fees.
* 30 percent of administrative cost allowances received
after October 1, 1998, for loans upon which insurance was issued before
October 1, 1998.
* Account maintenance fees.
* Default aversion fees.
* Amounts remaining from collections of defaulted loans
after payment of the Secretary's equitable share and depositing the
complement of the reinsurance percentage into the Federal Fund.
* Amounts transferred from the Federal Fund.
* Other receipts as specified in the Secretary's
regulations.
Except for funds an agency transfers from the Federal Fund under
section 422A(f) of the HEA, the Operating Fund is considered the
property of the guaranty agency. The HEA authorizes the Secretary to
regulate the uses or expenditure of the Operating Fund during any
period in which a guaranty agency owes money to the Federal Fund. These
proposed regulations would implement these requirements by providing
that Sec. 682.410(a)(2) and Sec. 682.418 apply to the use of the
Operating Fund during periods in which transfers from the Federal Fund
are outstanding.
Section 422B(d)(1) of the HEA specifies that funds in the Operating
Fund must be used for certain activities. Those activities are
application processing, loan disbursement, enrollment and repayment
status management, default aversion, collection activities, school and
lender training, financial aid awareness and outreach activities,
compliance monitoring, and other student financial aid related
activities, as selected by the guaranty agency. In addition to those
specified activities, the negotiators agreed that the Operating Fund
should also be permitted to be used to pay for other ``guaranty agency-
related activities.'' Some of the negotiators, however, expressed
concern that ``other student aid-related activities, as selected by the
guaranty agency'' was too ambiguous and proposed that more specificity
be included in the proposed regulations to more narrowly focus the use
of the funds in the Operating Fund for this purpose. The negotiators
ultimately agreed to include a requirement that the financial aid-
related activities must be for the benefit of students. The Secretary
will gather data concerning the use of funds in agencies' Operating
Funds for financial aid-related activities that benefit students and
will make the data available to the public.
Section 682.800 Prohibition Against Discrimination as a Condition for
Receiving Special Allowance Payments
The 1998 Amendments repealed the requirements of the ``Plan for
doing business'' for authorities using tax-exempt financing, except for
the non-discrimination provisions. In addition, the reference to
``handicapped status'' in the nondiscrimination factors listed in
section 438(e) of the HEA was changed to ``disability status.''
Appendix D--Policy for Waiving the Secretary's Right To Recover or
Refuse To Pay Interest Benefits, Special Allowance, and Reinsurance on
Stafford, PLUS, Supplemental Loans for Students, and Consolidation
Program Loans Involving Lenders' Violations of Federal Regulations
Pertaining to Due Diligence in Collection or Timely Filing of Claims
[Bulletin 88-G-138]
The proposed regulations would revise Appendix D to incorporate the
new default definition (270 days of delinquency or 330 days for loans
paid less frequently than monthly).
Executive Order 12866
1. Potential Costs and Benefits
Under Executive Order 12866, we have assessed the potential costs
and benefits of this regulatory action.
The potential costs associated with the proposed regulations are
those resulting from statutory requirements and those we have
determined as necessary for administering this program effectively and
efficiently. Elsewhere in this SUPPLEMENTARY INFORMATION section we
identify and explain burdens specifically associated with information
collection requirements. See the heading Paperwork Reduction Act of
1995.
In assessing the potential costs and benefits--both quantitative
and qualitative--of this regulatory action, we have determined that the
benefits would justify the costs.
We have also determined that this regulatory action would not
unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
We note that, as these proposed regulations were subject to
negotiated rulemaking, the costs and benefits of the various
requirements were discussed thoroughly by negotiators. The resultant
consensus reached on a particular requirement generally reflected
agreement on the best possible approach to that requirement in terms of
cost and benefit.
Summary of Potential Costs and Benefits
The following is an analysis of the costs and benefits of the most
significant provisions of the proposed regulations, all of which
reflect statutory changes included in the 1998 Amendments. There are
additional proposed changes, some of which do not result from the 1998
Amendments, intended to further improve the administration of the FFEL
Program, which are discussed elsewhere in this preamble under the
heading Proposed Regulatory Changes. The Department does not consider
there to be significant costs associated with those provisions.
Payment of Special Allowance on FFEL Loans
Section 682.302 incorporates the statutory modification of the
formula for calculating the amount of special allowance payable on FFEL
Program loans. Loan holders in the FFEL Program may receive an interest
subsidy, called special allowance, from the Government to ensure a
guaranteed rate of return on their loans.
Prior to the passage of the 1998 Amendments, the special allowance
formula for new Federal Stafford loans (subsidized or unsubsidized) was
to be based on a security of comparable maturity (the 10-20 year bond
interest rate) plus 1 percent. As such, the Government would have paid
loan holders a special allowance if the 10-20 year bond interest rate
plus 1 percent for in-school, grace, deferment, and repayment periods
was higher than the
[[Page 42186]]
interest rates charged to borrowers (which are capped at 8.25 percent).
Under the proposed regulations, for new Federal Stafford loans, the
Government would pay loan holders a special allowance if the 91-day
Treasury-bill (T-bill) interest rate for a given quarter, plus 2.8
percent (or 2.2 percent during in-school, grace, and deferment periods)
is higher than the current interest rates charged to borrowers (with
borrower interest rates capped at 8.25 percent).
The 1998 Amendments also changed the basis for calculating borrower
interest rates on new Federal Stafford loans from a security of
comparable maturity plus 1 percent for both in-school and repayment
periods to the 91-day T bill interest rate plus 1.7 percent for in-
school, grace, and deferment periods, and the 91-day T-bill interest
rate plus 2.3 percent for repayment. When the 1998 Amendments was
enacted, the 91-day T-bill interest rate plus 2.3 percent was equal to
the 10-20 year bond interest rate plus 1 percent. As a result, this
change had no financial impact for loans in repayment.
The 1998 Amendments included, in addition to the traditional
special allowance payments, a loan-holder special interest subsidy of
0.50 percent above the borrower interest rates at all times. This new
subsidy would provide loan holders $183 million for loans during in-
school, grace, and deferment status, and $407 million for loans in
repayment, for a total benefit to loan holders and a cost to the
Federal Government of $590 million for loans originated in FY 2000.
Federal Reinsurance Agreement
Section 682.404 incorporates several changes, discussed in detail
elsewhere in this preamble under the heading Proposed Regulatory
Changes, associated with the restructuring of guaranty agencies under
the 1998 Amendments. The statute moves toward a more performance-based
system with the establishment of a new funding and operating structure
for guaranty agencies.
The changes incorporated in Sec. 682.404 that have costs and
benefits for the Federal Government and for guaranty agencies are
outlined in the following discussion. For comparison purposes, the
amounts shown (except where noted) are for the life of loans originated
in FY 2000, as determined by the Credit Reform Act of 1990.
* The default reinsurance payment--the amount guaranty
agencies are reimbursed for claim payments to loan holders on defaulted
loans made on or after October 1, 1998--was reduced from 98 percent to
95 percent.
* The default collection retention percentage--the
percentage guaranty agencies may retain on defaulted loan collections--
was reduced from 27 percent to 24 percent, until October 1, 2003 when
the rate is further reduced to 23 percent.
* New fees were created that replace the Administrative Cost
Allowance. The new loan processing and issuance fee is 0.65 percent of
the total principal amount of the loans on which a guaranty agency
issued insurance in a given fiscal year. Beginning October 1, 2003 the
percentage is reduced to 0.40 percent. The account maintenance fee is
0.12 percent of the original principal amount of outstanding loans.
After fiscal year 2000, the fee is 0.10 percent of the original
principal amount of outstanding loans.
Reducing guaranty agency default reinsurance and default retention
would decrease guaranty agency revenues by $111 million and $68
million, respectively, for loans originated in FY 2000. Guaranty agency
revenue for loans originated in FY 2000 would increase by $154 million
for the loan processing and issuance fee and $213 million for the
account maintenance fee. (The account maintenance fee is paid on all
outstanding loans; for FY 2000, guaranty agencies are expected to
receive $212 million in cash for this fee.) The net benefit to guaranty
agencies, and the net cost to the Federal Government, would be $188
million for loans originated in FY 2000. These revenues and costs are a
direct result of changes made to the HEA by the 1998 Amendments, and
have been implemented prior to the development of these proposed
regulations.
[In millions of dollars]
------------------------------------------------------------------------
Costs to Costs to
Provision the guaranty
Government agencies
------------------------------------------------------------------------
Reducing guaranty agency default reinsurance.. ($111) $111
Reducing guaranty agency default retention.... (68) 68
New loan processing and issuance fee.......... 154 (154)
New account maintenance fee................... 213 (213)
-------------------------
Net Total................................. 188 (188)
------------------------------------------------------------------------
The 1998 Amendments also made a number of changes to the
qualifications and procedures for certain transfers between the Federal
Fund and the Operating Fund, which will not have an effect on the
overall assets managed by the guaranty agencies.
2. Clarity of the Regulations
Executive Order 12866 and the President's Memorandum of June 1,
1998 on ``Plain Language in Government Writing'' require each agency to
write regulations that are easy to understand.
The Secretary invites comments on how to make these proposed
regulations easier to understand, including answers to questions such
as the following:
* Are the requirements in the proposed regulations stated
clearly?
* Do the proposed regulations contain technical terms or
other wording that interferes with their clarity?
* Does the format of the proposed regulations (groupings and
order of sections, use of headings, paragraphing, etc.) aid or reduce
their clarity?
* Would the proposed regulations be easier to understand if
we divided them into more (but shorter) sections? (A ``section'' is
preceded by the symbol ``Sec. '' and a numbered heading; for example,
Sec. 682.205 Disclosure requirements for lenders.)
* Could the description of the proposed regulations in the
SUPPLEMENTARY INFORMATION section of this preamble be more helpful in
making the proposed regulations easier to understand? If so, how?
* What else could we do to make the proposed regulations
easier to understand?
Send any comments that concern how the Department could make these
proposed regulations easier to understand to the person listed in the
ADDRESSES section of the preamble.
Regulatory Flexibility Act Certification
The Secretary certifies that these proposed regulations would not
have a significant economic impact on a substantial number of small
entities.
[[Page 42187]]
Entities affected by these proposed regulations are guaranty
agencies and lenders that participate in the Title IV, HEA programs.
The 36 guaranty agencies are State and private nonprofit entities that
act as agents of the Federal Government and are not considered small
entities for this purpose. Nearly all of the roughly 4,800
participating FFEL loan holders would be defined as small entities
under U.S. Small Business Administration (SBA) guidelines. (Student
loans are originated by lenders and are often sold in packages to
larger secondary market participants.) Small lenders originate only 16
percent of new loans. The economic impact for loans originated in FY
2000 would be $30 million or approximately $6,300 per average lender.
The Secretary invites comments on this determination, and welcomes
proposals on any significant alternatives that would satisfy the same
legal and policy objectives of these proposals while minimizing the
economic impact on small entities.
Paperwork Reduction Act of 1995
Sections 682.305, 682.402, 682.404, 682.414, and 682.421 contain
information collection requirements. Under the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507(d)), the Department of Education has submitted
a copy of these sections to the Office of Management and Budget (OMB)
for its review.
Collection of Information: Federal Family Education Loan Program.
Documentation and notification requirements.
Guaranty agencies receive payments from the Secretary and others
for exclusive use in the FFEL Program. With respect to a guaranty
agency's Federal Fund, the accumulated surplus of those payments over
permissible expenditures is Federal property to be returned to the
Secretary upon the guaranty agency's termination or under certain other
circumstances. The same is true with respect to the guaranty agency's
Operating Fund if the Operating Fund contains Federal money. The
Secretary needs and uses the information to determine whether the
guaranty agencies comply with the requirements for safeguarding this
property and the limitations on it.
Collection of Information: Requirement for lenders to submit ED
Form 799 (request for interest and special allowance).
These proposed regulations would affect all FFEL lenders who owe
origination and loan fees to the Secretary. The 1998 Amendments
requires the Secretary to collect origination and loan fees owed by a
lender by offsetting the amount of interest and special allowance
payments due the lender or by collecting the amount of fees directly
from the lender. These proposed regulations would require a lender that
owes fees to the Secretary to submit a quarterly ED Form 799 (or comply
with whatever successor process to the ED Form 799 may exist in the
future) even if the lender is not owed, or does not wish to receive,
interest benefits or special allowance payments from the Secretary. The
Department already estimates the amount of hours a lender needs each
year to prepare and submit ED Form 799s under currently approved OMB
inventory control number 1840-0034. Under existing regulations, a
lender is required to submit an ED Form 799 only if it wants to receive
interest and special allowance payments from the Federal Government.
The Secretary will ask OMB to adjust the estimate of reporting hours on
OMB inventory control number 1840-0034 to reflect that the proposed
regulations would change the lender's option to submit an ED Form 799
to a requirement to submit the form (or comply with whatever successor
process to the ED Form 799 may exist in the future).
Collection of Information: Closed school discharge of a borrower's
loan obligation without an application form.
These proposed regulations would affect the potential loan
discharge for FFEL borrowers who have received a discharge of their
Federal Perkins Loan or their Federal Direct Loan, or who the Secretary
or the guaranty agency, with the Secretary's permission, determines
qualify for a discharge based on information in the Secretary or
guaranty agency's possession. These FFEL borrowers would not need to
submit a closed school loan discharge application to receive a
discharge. The total burden hour reduction (based on approximately 30
minutes per application) is not expected to be substantial because of
the small number of borrowers who would fall within these criteria.
Collection of Information: Annual notification to schools by
guaranty agencies that schools can request an automatic notification of
default aversion assistance requests.
The proposed regulations require a guaranty agency to accept a
blanket request from a school to be notified whenever any of the
school's current or former students are the subject of a default
aversion assistance request. The agency must notify schools annually of
the option to make this blanket request. Currently, there are 5,899
schools in the FFEL Program, and many of them participate with more
than one guaranty agency. Although the number of schools participating
with multiple guaranty agencies is not known, the collective burden for
the agencies should be minimal. It probably should not take a guaranty
agency more than an average of 6 minutes to notify each school.
Collection of Information: Submissions of default aversion
assistance requests by lenders and performance of default aversion
assistance activities by guaranty agencies.
Under these proposed regulations, default aversion assistance
essentially replaces the former preclaims and supplemental preclaims
assistance process. The renaming of this process, whereby a guaranty
agency assists the lender in attempting to prevent a default by a
borrower who is at least 60 days delinquent, should not result in a
change to the current burden hour estimate associated with the former
process of requesting and providing such assistance.
Collection of Information: Reduction in the length of time a lender
must retain loan records.
These proposed regulations would affect all FFEL lenders by
reducing the length of time a lender must retain required loan records
for loans paid in full by the borrower from 5 years to 3 years from the
date the loan is repaid in full by the borrower. For all other loans
for which the lender receives payment in full from any other source
(for example, a claim payment or a consolidation payoff), or for those
loans that are not paid in full, the 5-year retention period will
continue to be in effect, except that in particular cases, the
Secretary or the guaranty agency may require the retention of records
beyond the 3-year or 5-year minimum periods. A guaranty agency could
serve as a lender's agent for the purpose of maintaining the lender's
records for the required time periods.
The Department already estimates the financial cost and amount of
hours a lender needs each year to maintain loan records under currently
approved OMB inventory control number 1840-0538. The estimate of lender
burden hours required to maintain loan records will not be shown in
these proposed regulations because that estimate is not affected by the
proposed reduction in the length of the minimum record retention
period. The Secretary will ask OMB to adjust the financial cost
estimate on OMB inventory control number 1840-0538 to reflect the
reduction in the length of the minimum record retention period.
[[Page 42188]]
Collection of Information: Guaranty agency option to transfer funds
from the Federal Fund into the agency's Operating Fund.
A guaranty agency that wants to transfer money from the Federal
Fund to its Operating Fund must provide the Secretary with the
information and certifications specified in these proposed regulations.
There are 36 guaranty agencies. Some may decline the opportunity to
transfer funds, while others may choose to do so more than once. The
amount of time required for an agency to assemble its request to the
Secretary is not known at this time, but it should not be substantial
because the required information and certifications either should
already be known by the agency or should be easily collected.
If you want to comment on the information collection requirements,
please send your comments to the Office of Information and Regulatory
Affairs, OMB, room 10235, New Executive Office Building, Washington, DC
20503; Attention: Desk Officer for U.S. Department of Education. You
may also send a copy of these comments to the Department representative
named in the ADDRESSES section of this preamble.
We consider your comments on these proposed collections of
information in--
* Deciding whether the proposed collections are necessary
for the proper performance of our functions, including whether the
information will have practical use;
* Evaluating the accuracy of our estimate of the burden of
the proposed collections, including the validity of our methodology and
assumptions;
* Enhancing the quality, usefulness, and clarity of the
information we collect; and
* Minimizing the burden on those who must respond. This
includes exploring the use of appropriate automated, electronic,
mechanical, or other technological collection techniques or other forms
of information technology; e.g., permitting electronic submission of
responses.
OMB is required to make a decision concerning the collections of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, to ensure that OMB gives your comments full consideration,
it is important that OMB receives the comments within 30 days of
publication. This does not affect the deadline for your comments to us
on the proposed regulations.
Intergovernmental Review
The FFEL Program is not subject to Executive Order 12372 and the
regulations in 34 CFR part 79.
Assessment of Educational Impact
The Secretary particularly requests comments on whether these
proposed regulations would require transmission of information that any
other agency or authority of the United States gathers or makes
available.
Electronic Access to This Document
You may view this document in text or Adobe Portable Document
Format (PDF) on the Internet at the following sites:
http://ocfo.ed.gov/fedreg.htm
http://ifap.ed.gov/csb__html/fedlreg.htm
http://www.ed.gov/legislation/HEA/rulemaking/
To use the PDF, you must have the Adobe Acrobat Reader Program with
Search, which is available free at the first of the previous sites. If
you have questions about using the PDF, call the U.S. Government
Printing Office (GPO), toll free, at 1-888-293-6498; or in the
Washington, DC, area at (202) 512-1530.
Note: The official version of this document is the document
published in the Federal Register. Free Internet access to the
official edition of the Federal Register and the Code of Federal
Regulations is available on GPO Access at:
http://www.access.gpo.gov/nara/index.html
(Catalog of Federal Domestic Assistance Number 84.032 Federal Family
Education Loan Program)
List of Subjects in 34 CFR Part 682
Administrative practice and procedure, Colleges and universities,
Education, Loan programs--education, Reporting and recordkeeping
requirements, Student aid, Vocational education.
Dated: July 12, 1999.
Richard W. Riley,
Secretary of Education.
For the reasons discussed in the preamble, the Secretary proposes
to amend part 682 of Title 34 of the Code of Federal Regulations as
follows:
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM
1. The authority citation for part 682 continues to read as
follows:
Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.
2. Section 682.205 is amended by:
A. Revising paragraphs (a)(1) and (a)(2)(i).
B. Redesignating paragraphs (a)(2)(ii) through (a)(2)(xvii) as
paragraphs (a)(2)(v) through (a)(2)(xx), respectively.
C. Adding new paragraphs (a)(2)(ii) through (a)(2)(iv).
D. Adding a new paragraph (a)(3).
E. Revising paragraphs (b), (c)(1), (c)(2)(i), (d), and (e).
F. Adding new paragraphs (f), (g), and (h).
Sec. 682.205 Disclosure requirements for lenders.
(a) * * *
(1) A lender must disclose the information described in paragraph
(a)(2) of this section to a borrower, in simple and understandable
terms, before or at the time of the first disbursement on a Federal
Stafford or Federal PLUS loan. The information given to the borrower
must prominently and clearly display, in bold type, a clear and concise
statement that the borrower is receiving a loan that must be repaid.
(2) * * *
(i) The lender's name;
(ii) A toll-free telephone number accessible from within the United
States that the borrower can use to obtain additional loan information;
(iii) The address to which correspondence with the lender and
payments should be sent;
(iv) Notice that the lender may sell or transfer the loan to
another party and, if it does, that the address and identity of the
party to which correspondence and payments should be sent may change;
* * * * *
(3) With the exception of paragraphs (a)(2)(i) through (a)(2)(iii),
(a)(2)(v) through (a)(2)(vii), and (a)(2)(xx) of this section, the
promissory note approved by the Secretary satisfies these disclosure
requirements.
(b) Separate statement of borrower rights and responsibilities. In
addition to the disclosures required by paragraph (a) of this section,
the lender must provide the borrower with a separate written statement,
using simple and understandable terms, at or prior to the time of the
first disbursement, that summarizes the rights and responsibilities of
the borrower with respect to the loan. The statement must also warn the
borrower about the consequences described in paragraph (a)(2)(xvi) of
this section if the borrower defaults on the loan. The Borrower's
Rights and Responsibilities statement approved by the Secretary
satisfies this requirement.
(c) * * *
(1) The lender must disclose the information described in paragraph
(c)(2) of this section, in simple and
[[Page 42189]]
understandable terms, in a statement provided to the borrower at or
prior to the beginning of the repayment period. In the case of a
Federal Stafford or Federal SLS loan, the disclosures required by this
paragraph must be made not less than 30 days nor more than 240 days
before the first payment on the loan is due from the borrower. If the
borrower enters the repayment period without the lender's knowledge,
the lender must provide the required disclosures to the borrower
immediately upon discovering that the borrower has entered the
repayment period.
(2) * * *
(i) The lender's name, a toll free telephone number accessible from
within the United States that the borrower can use to obtain additional
loan information, and the address to which correspondence with the
lender and payments should be sent;
* * * * *
(d) Exception to disclosure requirement. In the case of a Federal
PLUS loan, the lender is not required to provide the information in
paragraph (c)(2)(viii) of this section if the lender, in lieu of that
disclosure, provides the borrower with sample projections of the
monthly repayment amounts assuming different levels of borrowing and
interest accruals resulting from capitalization of interest while the
student is in school. Sample projections must disclose the cost to the
borrower of principal and interest, interest only, and capitalized
interest. The lender may rely on the PLUS promissory note and
associated materials approved by the Secretary for purposes of
complying with this section.
(e) Borrower may not be charged for disclosures. The lender must
provide the information required by this section at no cost to the
borrower.
(f) Method of disclosure. Any disclosure of information by a lender
under this section may be through written or electronic means.
(g) Plain language disclosure. The plain language disclosure text,
as approved by the Secretary, must be provided to a borrower in
conjunction with subsequent loans taken under a previously signed
Master Promissory Note. The requirements of paragraphs (a) and (b) of
this section are satisfied for subsequent loans if the borrower is sent
the plain language disclosure text and an initial disclosure containing
the information required by paragraphs (a)(2)(i) through (iii),
(a)(2)(v), (a)(2)(vi), (a)(2)(vii), and (a)(2)(xx) of this section.
(h) Notice of availability of income-sensitive repayment option.
(1) At the time of offering a borrower a loan and at the time of
offering a borrower repayment options, the lender must provide the
borrower with a notice that informs the borrower of the availability of
income-sensitive repayment. This information may be provided in a
separate notice or as part of the other disclosures required by this
section. The notice must inform the borrower--
(i) That the borrower is eligible for income-sensitive repayment,
including through loan consolidation;
(ii) Of the procedures by which the borrower can elect income-
sensitive repayment; and
(iii) Of where and how the borrower may obtain more information
concerning income-sensitive repayment.
(2) The promissory note and associated materials approved by the
Secretary satisfy the loan origination notice requirements provided for
in paragraph (h)(1) of this section.
3. Section 682.207 is amended by revising paragraph (b)(1)(vi) and
adding a new paragraph (b)(1)(vii) to read as follows:
Sec. 682.207 Due diligence in disbursing a loan.
* * * * *
(b) * * *
(1) * * *
(vi) Except as provided in paragraph (d)(2) of this section, may
not disburse a second or subsequent disbursement of a Federal Stafford
loan to a student who has ceased to be enrolled; and
(vii) May disburse a second disbursement of a Federal Stafford
loan, at the request of the school, even if the student or the school
returned the first disbursement, unless the lender has information that
the student is no longer enrolled.
* * * * *
4. Section 682.208 is amended by adding a new paragraph (c)(3) to
read as follows:
Sec. 682.208 Due diligence in servicing a loan.
* * * * *
(c) * * *
(3)(i) If the borrower disputes the terms of the loan in writing
and the lender does not resolve the dispute, the lender's response must
provide the borrower with an appropriate contact at the guaranty agency
for the resolution of the dispute.
(ii) If the guaranty agency does not resolve the dispute, the
agency's response must provide the borrower with information on the
availability of the Student Loan Ombudsman's office.
* * * * *
5. Section 682.210 is amended by revising paragraph (a)(5) to read
as follows:
Sec. 682.210 Deferment.
(a) * * *
(5) An authorized deferment period begins on the date the condition
entitling the borrower to the deferment first exists; however, except
for the deferments described in paragraphs (b)(1)(i) and (s)(2) of this
section, a deferment cannot begin more than six months before the date
the lender receives a request and documentation required for the
deferment.
* * * * *
6. Section 682.211 is amended by revising paragraph (f)(2), and
adding a new paragraph (f)(10) to read as follows:
Sec. 682.211 Forbearance.
* * * * *
(f) * * *
(2) Upon the beginning of an authorized deferment period under
Sec. 682.210, or a mandatory administrative forbearance period as
specified under paragraph (j)(2) of this section;
* * * * *
(10) For a period not to exceed 3 months for a borrower who is
affected by a natural disaster.
* * * * *
Sec. 682.215 [Removed]
7. Section 682.215 is removed.
8. Section 682.302 is amended to read as follows by:
A. Revising paragraph (b)(1) and the introductory text of paragraph
(b)(2).
B. In paragraph (b)(2)(ii), removing the word ``or'' that appears
after the semi-colon.
C. In paragraph (b)(2)(iii), removing the period and adding, in its
place, ``; or''.
Adding a new paragraph (b)(2)(iv).
E. Redesignating paragraphs (c)(1)(iii)(A) through (E) as
paragraphs (c)(1)(iii)(C) through (G), respectively.
F. Revising redesignated paragraph (c)(1)(iii)(C).
G. Adding new paragraphs (c)(1)(iii)(A) and (B).
H. Revising paragraph (c)(3)(i)(A).
I. Adding a new paragraph (c)(4).
Sec. 682.302 Payment of special allowance on FFEL loans.
* * * * *
(b) * * *
(1) Except for non-subsidized Federal Stafford loans disbursed on
or after October 1, 1981, for periods of enrollment beginning prior to
October 1, 1992, or as provided in paragraphs (b)(2) through (b)(4), or
(e) of this section, FFEL loans that otherwise meet program
requirements are eligible for special allowance payments.
(2) For a loan made under the Federal SLS or Federal PLUS Program
on or
[[Page 42190]]
after July 1, 1987 and prior to July 1, 1994, and for any Federal PLUS
loan made on or after July 1, 1998 or under Sec. 682.209(e) or (f), no
special allowance is paid for any period for which the interest rate
calculated prior to applying the interest rate maximum for that loan
does not exceed--
* * * * *
(iv) 9 percent in the case of a Federal PLUS loan made on or after
October 1, 1998.
(c) * * *
(1) * * *
(iii) * * *
(A)(1) 2.8 percent to the resulting percentage for a Federal
Stafford loan for which the first disbursement is made on or after July
1, 1998; or
(2) 2.2 percent to the resulting percentage for a Federal Stafford
loan for which the first disbursement is made on or after July 1, 1998
during the borrower's in-school, grace, and authorized period of
deferment;
(B) 2.5 percent to the resulting percentage for a Federal Stafford
loan for which the first disbursement is made on or after July 1, 1995
for interest that accrues during the borrower's in-school, grace, and
authorized period of deferment;
(C) Except as provided in paragraph (c)(1)(iii)(B) of this section,
3.1 percent to the resulting percentage for a Federal Stafford Loan
made on or after October 1, 1992 and prior to July 1, 1998, and for any
Federal SLS, Federal PLUS, or Federal Consolidation Loan made on or
after October 1, 1992;
* * * * *
(3)(i) * * *
(A) The proceeds of tax-exempt obligations originally issued prior
to October 1, 1993, the income from which is exempt from taxation under
the Internal Revenue Code of 1986;
* * * * *
(4) Loans made or purchased with funds obtained by the holder from
the issuance of obligations originally issued on or after October 1,
1993, and loans made with funds derived from default reimbursement
collections, interest, or other income related to eligible loans made
or purchased with those tax-exempt funds, do not qualify for the
minimum special allowance rate specified in paragraph (c)(3)(iii) of
this section, and are not subject to the 50 percent limitation on the
maximum rate otherwise applicable to loans made with tax-exempt funds.
* * * * *
9. Section 682.305 is amended by:
A. Revising the heading and paragraph (a)(1).
B. Adding new paragraphs (a)(3)(iii) through (v).
C. Revising paragraph (c)(1).
Sec. 682.305 Procedures for payment of interest benefits and special
allowance and collection of origination and loan fees.
(a) * * *
(1) If a lender owes origination fees or loan fees under paragraph
(a) of this section, it must submit quarterly reports to the Secretary
on a form provided or prescribed by the Secretary, even if the lender
is not owed, or does not wish to receive, interest benefits or special
allowance from the Secretary.
* * * * *
(3) * * *
(iii) The Secretary collects from an originating lender the amount
of origination fees the originating lender was authorized to collect
from borrowers during the quarter whether or not the originating lender
actually collected those fees. The Secretary also collects the fees the
originating lender is required to pay under paragraph (a)(3)(ii) of
this section. Generally, the Secretary collects the fees from the
originating lender by offsetting the amount of interest benefits and
special allowance payable to the originating lender in a quarter, and,
if necessary, the amount of interest benefits and special allowance
payable in subsequent quarters may be offset until the total amount of
fees has been recovered.
(iv) If the full amount of the fees cannot be collected within two
quarters by reducing interest and special allowance payable to the
originating lender, the Secretary may collect the unpaid amount
directly from the originating lender.
(v) If the full amount of the fees cannot be collected within two
quarters from the originating lender in accordance with paragraphs
(a)(3) (iii) and (iv) of this section and if the originating lender has
transferred the loan to a subsequent holder, the Secretary may,
following written notice, collect the unpaid amount from the holder by
using the same steps described in paragraphs (a)(3) (iii) and (iv) of
this section, with the term ``holder'' substituting for the term
``originating lender''.
* * * * *
(c) * * *
(1) If a lender originates or holds more than $5 million in FFEL
loans during its fiscal year, it must submit an independent annual
compliance audit for that year, conducted by a qualified independent
organization or person. The Secretary may, following written notice,
suspend the payment of interest benefits and special allowance to a
lender that does not submit its audit within the time period prescribed
in paragraph (c)(2) of this section.
* * * * *
Sec. 682.400 [Amended]
10. Section 682.400 is amended by:
A. In paragraph (b)(1)(i), adding the word ``and'' after the semi-
colon.
B. In paragraph (b)(1)(ii), removing ``; and'' and adding, in its
place, a period.
C. Removing paragraph (b)(1)(iii).
11. Section 682.401 is amended by:
A. Revising paragraph (b)(11).
B. In the introductory text of paragraph (b)(23)(i), removing the
words ``as defined in Sec. 682.800(d)''.
C. Adding a heading to paragraph (c).
D. Revising paragraphs (c)(1), (c)(2), and (c)(3).
E. Adding a new paragraph (c)(5).
F. Revising paragraphs (e)(1) and (e)(3).
Sec. 682.401 Basic program agreement.
* * * * *
(b) * * *
(11) Inquiries. The agency must be able to receive and respond to
written, electronic, and telephone inquiries.
* * * * *
(c) Lender-of-last-resort. (1) The guaranty agency must ensure that
it, or an eligible lender described in section 435(d)(1)(D) of the HEA,
serves as a lender-of-last-resort in the State in which the guaranty
agency is the designated guaranty agency. The guaranty agency or an
eligible lender described in section 435(d)(1)(D) of the HEA may
arrange for a loan required to be made under paragraph (c)(2) of this
section to be made by another eligible lender. As used in this
paragraph, the term ``designated guaranty agency'' means the guaranty
agency in the State for which the Secretary has signed a Basic Program
Agreement under Sec. 682.401.
(2) The lender-of-last-resort must make subsidized Federal Stafford
loans and unsubsidized Federal Stafford loans to any eligible student
who--
(i) Qualifies for interest benefits pursuant to Sec. 682.301;
(ii) Qualifies for a combined loan amount of at least $200; and
(iii) Has been otherwise unable to obtain loans from another
eligible lender for the same period of enrollment.
(3) The lender-of-last-resort may make unsubsidized Federal
Stafford and Federal PLUS loans to borrowers who have been otherwise
unable to obtain those loans from another eligible lender.
* * * * *
(5)(i) Upon request of the guaranty agency, the Secretary may
advance
[[Page 42191]]
Federal funds to the agency, on terms and conditions agreed to by the
Secretary and the agency, to ensure the availability of loan capital
for subsidized and unsubsidized Federal Stafford and Federal PLUS loans
to borrowers who are otherwise unable to obtain those loans if the
Secretary determines that--
(A) Eligible borrowers in a State who qualify for subsidized
Federal Stafford loans are seeking and are unable to obtain subsidized
Federal Stafford loans;
(B) The guaranty agency designated for that State has the
capability for providing lender-of-last-resort loans in a timely
manner, either directly or indirectly using a third party, in
accordance with the guaranty agency's obligations under the HEA, but
cannot do so without advances provided by the Secretary; and
(C) It would be cost-effective to advance Federal funds to the
agency.
(ii) If the Secretary determines that the designated guaranty
agency does not have the capability to provide lender-of-last-resort
loans, in accordance with paragraph (c)(5)(i) of this section, the
Secretary may provide Federal funds to another guaranty agency, under
terms and conditions agreed to by the Secretary and the agency, to make
lender-of-last-resort loans in that State.
* * * * *
(e) * * *
(1) Offer directly or indirectly any premium, payment, or other
inducement to an employee or student of a school, or an entity or
individual affiliated with a school, to secure applicants for FFEL
loans, except that a guaranty agency is not prohibited from providing
assistance to schools comparable to the kinds of assistance provided by
the Secretary to schools under, or in furtherance of, the Federal
Direct Loan Program;
* * * * *
(3) Mail or otherwise distribute unsolicited loan applications to
students enrolled in a secondary school or a postsecondary institution,
or to parents of those students, unless the potential borrower has
previously received loans insured by the guaranty agency;
* * * * *
12. Section 682.402 is amended by:
A. Revising the introductory text following the heading of
paragraph (d)(3).
B. Adding a new paragraph (d)(8).
C. Revising paragraph (f)(2).
Sec. 682.402 Death, disability, closed school, false certification,
and bankruptcy payments.
* * * * *
(d) * * *
(3) * * * Except as provided in paragraph (d)(7) of this section,
in order to qualify for a discharge of a loan under paragraph (d) of
this section, a borrower must submit a written request and sworn
statement to the holder of the loan. The statement need not be
notarized, but must be made by the borrower under the penalty of
perjury, and, in the statement, the borrower must state--
* * * * *
(8) Discharge without an application. A borrower's obligation to
repay an FFEL Program loan may be discharged without an application
from the borrower if the--
(i) Borrower received a discharge on a loan pursuant to 34 CFR
674.33(g) under the Federal Perkins Loan Program, or 34 CFR 685.213
under the William D. Ford Federal Direct Loan Program; or
(ii) The Secretary or the guaranty agency, with the Secretary's
permission, determines that the borrower qualifies for a discharge
based on information in the Secretary or guaranty agency's possession.
* * * * *
(f) * * *
(2) Suspension of collection activity. If the lender is notified
that a borrower has filed a petition for relief in bankruptcy, the
lender must immediately suspend any collection efforts outside the
bankruptcy proceeding against the borrower, and may suspend collection
efforts against any co-maker or endorser on the loan.
* * * * *
13. Section 682.404 is amended to read as follows by:
A. Revising the introductory text of paragraph (a)(1).
B. Redesignating paragraph (a)(1)(ii) as (a)(1)(iii).
C. Revising paragraph (a)(1)(i), adding a new paragraph (a)(1)(ii),
and revising redesignated paragraph (a)(1)(iii) introductory text.
D. Removing paragraphs (a)(2)(iii) and (a)(3), and revising
paragraph (a)(2)(ii).
E. Redesignating paragraphs (a)(4) and (a)(5) as paragraphs (a)(3)
and (a)(4), respectively.
F. Revising the redesignated paragraph (a)(4).
G. Revising the heading for paragraph (b), and removing the word
``or'' at the end of paragraph (b)(1)(i).
H. Revising paragraphs (b)(1)(ii) and (b)(2)(ii), and adding a new
paragraph (b)(1)(iii).
I. Removing the word ``or'' after the semi-colon in paragraph
(b)(2)(i).
J. Adding a new paragraph (b)(2)(iii).
K. Revising the heading for paragraph (g).
L. Revising paragraphs (g)(1) and (g)(2), and removing paragraph
(g)(3).
M. Redesignating paragraph (i) as paragraph (l).
N. Adding new paragraphs (i), (j), and (k).
Sec. 682.404 Federal reinsurance agreement.
(a) * * *
(1) The Secretary may enter into a reinsurance agreement with a
guaranty agency that has a basic program agreement. Except as provided
in paragraph (b) of this section, under a reinsurance agreement, the
Secretary reimburses the guaranty agency for--
(i) 95 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made on or after October
1, 1998;
(ii) 98 percent of its losses on default claim payments to lenders
for loans made on or after October 1, 1993, and before October 1, 1998;
or
(iii) 100 percent of its losses on default claim payments to
lenders--
* * * * *
(2) * * *
(ii) Default aversion assistance means the activities of a guaranty
agency that are designed to prevent a default by a borrower who is at
least 60 days delinquent and that are directly related to providing
collection assistance to the lender.
* * * * *
(4) If a lender has requested default aversion assistance as
described in paragraph (a)(2)(ii) of this section, the agency must,
upon request of the school at which the borrower received the loan,
notify the school of the lender's request. The guaranty agency may not
charge the school or the school's agent for providing this notification
and must accept a blanket request from the school to be notified
whenever any of the school's current or former students are the subject
of a default aversion assistance request. The agency must notify
schools annually of the option to make this blanket request.
(b) Reduction in reinsurance rate.
(1) * * *
(ii) 88 percent of its losses on default claim payments to lenders
on loans made on or after October 1, 1993, and before October 1, 1998;
or
(iii) 85 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made on or after October
1, 1998.
(2) * * *
[[Page 42192]]
(ii) 78 percent of its losses on default claim payments to lenders
on loans made on or after October 1, 1993, and before October 1, 1998;
or
(iii) 75 percent of its losses on default claim payments to lenders
on loans for which the first disbursement is made on or after October
1, 1998.
* * * * *
(g) Share of borrower payments returned to the Secretary.
(1) After an agency pays a default claim to a holder using assets
of the Federal Fund, the agency must pay to the Secretary the portion
of payments received on those defaulted loans remaining after--
(i) The agency deposits into the Federal Fund the amount of those
payments equal to the applicable complement of the reinsurance
percentage that was in effect at the time the claim was paid; and
(ii) The agency has deducted an amount equal to--
(A) 30 percent of borrower payments received before October 1,
1993;
(B) 27 percent of borrower payments received on or after October 1,
1993, and before October 1, 1998;
(C) 24 percent of borrower payments received on or after October 1,
1998, and before October 1, 2003; and
(D) 23 percent of borrower payments received on or after October 1,
2003.
(2) Unless the Secretary approves otherwise, the guaranty agency
must pay to the Secretary the Secretary's share of borrower payments
within 45 days of its receipt of the payments.
* * * * *
(i) Account maintenance fee. A guaranty agency is paid an account
maintenance fee based on the original principal amount of outstanding
FFEL Program loans insured by the agency. For fiscal years 1999 and
2000, the fee is 0.12 percent of the original principal amount of
outstanding loans. After fiscal year 2000, the fee is 0.10 percent of
the original principal amount of outstanding loans.
(j) Loan processing and issuance fee. A guaranty agency is paid a
loan processing and issuance fee based on the principal amount of FFEL
Program loans originated during a fiscal year that are insured by the
agency. The fee is paid quarterly. No payment is made for loans for
which the disbursement checks have not been cashed or for which
electronic funds transfers have not been completed. For fiscal years
1999 through 2003, the fee is 0.65 percent of the principal amount of
loans originated. Beginning October 1, 2003, the fee is 0.40 percent.
(k) Default aversion fee.
(1) General. If a guaranty agency performs default aversion
activities on a delinquent loan in response to a lender's request for
default aversion assistance on that loan, the agency receives a default
aversion fee. The fee may not be paid more than once on any loan. The
lender's request for assistance must be submitted to the guaranty
agency no earlier than the 60th day and no later than the 120th day of
the borrower's delinquency.
(2) Amount of fees transferred. No more frequently than monthly, a
guaranty agency may transfer default aversion fees from the Federal
Fund to its Operating Fund. The amount of the fees that may be
transferred is equal to--
(i) One percent of the unpaid principal and accrued interest owed
on loans that were submitted by lenders to the agency for default
aversion assistance; minus
(ii) One percent of the unpaid principal and accrued interest owed
by borrowers on default claims that--
(A) Were paid by the agency for the same time period for which the
agency transferred default aversion fees from its Federal Fund; and
(B) For which default aversion fees have been received by the
agency.
(3) Calculation of fee.
(i) For purposes of calculating the one percent default aversion
fee described in paragraph (k)(2)(i) of this section, the agency must
use the total unpaid principal and accrued interest owed by the
borrower as of the date the default aversion assistance request is
submitted by the lender.
(ii) For purposes of paragraph (k)(2)(ii) of this section, the
agency must use the total unpaid principal and accrued interest owed by
the borrower as of the date the agency paid the default claim.
(4) Prohibition against conflicts. If a guaranty agency contracts
with an outside entity to perform any default aversion activities, that
outside entity may not--
(i) Hold or service the loan; or
(ii) Perform collection activities on the loan in the event of
default within 3 years of the claim payment date.
* * * * *
14. Section 682.406 is amended by revising the heading, the
introductory text of paragraph (a), and paragraph (a)(14) to read as
follows:
Sec. 682.406 Conditions for claim payments from the Federal Fund and
for reinsurance coverage.
(a) A guaranty agency may make a claim payment from the Federal
Fund and receive a reinsurance payment on a loan only if--
* * * * *
(14) The guaranty agency certifies to the Secretary that diligent
attempts have been made by the lender and the guaranty agency under
Sec. 682.411(h) to locate the borrower through the use of effective
skip tracing techniques, including contact with the school the student
attended.
* * * * *
15. Section 682.409 is amended by revising the introductory text of
paragraph (a)(1) to read as follows:
Sec. 682.409 Mandatory assignment by guaranty agencies of defaulted
loans to the Secretary.
(a)(1) If the Secretary determines that action is necessary to
protect the Federal fiscal interest, the Secretary directs a guaranty
agency to promptly assign to the Secretary any loans held by the agency
on which the agency has received payment under Secs. 682.402(f),
682.402(k), or 682.404. The collection of unpaid loans owed by Federal
employees by Federal salary offset is, among other things, deemed to be
in the Federal fiscal interest. Unless the Secretary notifies an
agency, in writing, that other loans must be assigned to the Secretary,
an agency must assign any loan that meets all of the following criteria
as of April 15 of each year:
* * * * *
16. Section 682.410 is amended by adding a new paragraph
(b)(5)(vii) to read as follows:
Sec. 682.410 Fiscal, administrative, and enforcement requirements.
* * * * *
(b) * * *
(5) * * *
(vii) As part of the guaranty agency's response to a borrower who
appeals an adverse decision resulting from the agency's administrative
review of the loan obligation, the agency must provide the borrower
with information on the availability of the Student Loan Ombudsman's
office.
* * * * *
17. Section 682.411 is revised to read as follows:
Sec. 682.411 Lender due diligence in collecting guaranty agency loans.
(a) General. In the event of delinquency on an FFEL Program loan,
the lender must engage in at least the collection efforts described in
paragraphs (d) through (n) of this section, except that in the case of
a loan made to a borrower who is incarcerated or to a borrower residing
outside a State, Mexico, or Canada, the lender may send
[[Page 42193]]
a forceful collection letter in lieu of each telephone effort required
by this section.
(b) Delinquency.
(1) For purposes of this section, delinquency on a loan begins on
the first day after the due date of the first missed payment that is
not later made. The due date of the first payment is established by the
lender but must occur by the deadlines specified in Sec. 682.209(a) or,
if the lender first learns after the fact that the borrower has entered
the repayment period, no later than 75 days after the day the lender so
learns, except as provided in Sec. 682.209(a)(2)(v) and (a)(3)(ii)(E).
If a payment is made late, the first day of delinquency is the day
after the due date of the next missed payment that is not later made. A
payment that is within five dollars of the amount normally required to
advance the due date may nevertheless advance the due date if the
lender's procedures allow for that advancement.
(2) At no point during the periods specified in paragraphs (d) and
(e) of this section may the lender permit the occurrence of a gap in
collection activity, as defined in paragraph (j) of this section, of
more than 45 days (60 days in the case of a transfer).
(3) As part of one of the collection activities provided for in
this section, the lender must provide the borrower with information on
the availability of the Student Loan Ombudsman's office.
(c) 1-15 days delinquent. Except in the case in which a loan is
brought into this period by a payment on the loan, expiration of an
authorized deferment or forbearance period, or the lender's receipt
from the drawee of a dishonored check submitted as a payment on the
loan, the lender during this period must send at least one written
notice or collection letter to the borrower informing the borrower of
the delinquency and urging the borrower to make payments sufficient to
eliminate the delinquency. The notice or collection letter sent during
this period must include, at a minimum, a lender or servicer contact, a
telephone number, and a prominent statement informing the borrower that
assistance may be available if he or she is experiencing difficulty in
making a scheduled repayment.
(d) 16-180 days delinquent (16-240 days delinquent for a loan
repayable in installments less frequently than monthly).
(1) Unless exempted under paragraph (d)(4) of this section, during
this period the lender must engage in at least four diligent efforts to
contact the borrower by telephone and send at least four collection
letters urging the borrower to make the required payments on the loan.
At least one of the diligent efforts to contact the borrower by
telephone must occur on or before, and another one must occur after,
the 90th day of delinquency. Collection letters sent during this period
must include, at a minimum, information for the borrower regarding
deferment, forbearance, income-sensitive repayment and loan
consolidation, and other available options to avoid default.
(2) At least two of the collection letters required under paragraph
(d)(1) of this section must warn the borrower that, if the loan is not
paid, the lender will assign the loan to the guaranty agency that, in
turn, will report the default to all national credit bureaus, and that
the agency may institute proceedings to offset the borrower's State and
Federal income tax refunds and other payments made by the Federal
Government to the borrower or to garnish the borrower's wages, or to
assign the loan to the Federal Government for litigation against the
borrower.
(3) Following the lender's receipt of a payment on the loan or a
correct address for the borrower, the lender's receipt from the drawee
of a dishonored check received as a payment on the loan, the lender's
receipt of a correct telephone number for the borrower, or the
expiration of an authorized deferment or forbearance period, the lender
is required to engage in only--
(i) Two diligent efforts to contact the borrower by telephone
during this period, if the loan is less than 91 days delinquent (121
days delinquent for a loan repayable in installments less frequently
than monthly) upon receipt of the payment, correct address, correct
telephone number, or returned check, or expiration of the deferment or
forbearance; or
(ii) One diligent effort to contact the borrower by telephone
during this period if the loan is 91-120 days delinquent (121-180 days
delinquent for a loan repayable in installments less frequently than
monthly) upon receipt of the payment, correct address, correct
telephone number, or returned check, or expiration of the deferment or
forbearance.
(4) A lender need not attempt to contact by telephone any
borrower--
(i) Who is incarcerated;
(ii) Who is residing outside of a State, Mexico or Canada;
(iii) Whose telephone number is unknown;
(iv) Who is more than 120 days delinquent (180 days delinquent for
a loan repayable in installments less frequent than monthly) following
the lender's receipt of--
(A) A payment on the loan;
(B) A correct address or correct telephone number for the borrower;
(C) A dishonored check received from the drawee as a payment on the
loan; or
(D) The expiration of an authorized deferment or forbearance.
(e) 181-270 days delinquent (241-330 days delinquent for a loan
repayable in installments less frequently than monthly). During this
period the lender must engage in efforts to urge the borrower to make
the required payments on the loan. These efforts must, at a minimum,
provide information to the borrower regarding options to avoid default
and the consequences of defaulting on the loan.
(f) Final demand. On or after the 241st day of delinquency, (the
301st day for loans payable in less frequent installments than monthly)
the lender must send a final demand letter to the borrower requiring
repayment of the loan in full and notifying the borrower that a default
will be reported to a national credit bureau. The lender must allow the
borrower at least 30 days after the date the letter is mailed to
respond to the final demand letter and to bring the loan out of default
before filing a default claim on the loan.
(g) Collection procedures when borrower's telephone number is not
available. Upon completion of a diligent but unsuccessful effort to
ascertain the correct telephone number of a borrower as required by
paragraph (m) of this section, the lender is excused from any further
efforts to contact the borrower by telephone, unless the borrower's
number is obtained before the 211th day of delinquency (the 271st day
for loans repayable in installments less frequently than monthly).
(h) Skip-tracing.
(1) Unless the letter specified under paragraph (f) of this section
has already been sent, within 10 days of its receipt of information
indicating that it does not know the borrower's current address, the
lender must begin to diligently attempt to locate the borrower through
the use of effective commercial skip-tracing techniques. These efforts
must include, but are not limited to, sending a letter to or making a
diligent effort to contact each endorser, relative, reference,
individual, and entity, including the school the student most recently
attended, identified in the borrower's loan file. For this purpose, a
lender's contact with a school official who might reasonably be
expected to know the borrower's address may be with someone other than
the financial aid administrator, and may be in writing
[[Page 42194]]
or by phone calls. These efforts must b